Commentary

High stakes in tiny Bahrain

Commentary: Clashes shake a fragile region’s industrial hub

SAN FRANCISCO (MarketWatch) — Political violence in Bahrain is stirring markets worldwide. Oil traders hang on every news bulletin from its capital, Manama, where protesters are challenging the rule of an entrenched monarchy.

Mideast trouble watch continues

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Protests across the troubled region will continue to affect U.S. markets and could push oil and gold prices higher during a holiday-shortened week, MarketWatch's Greg Morcroft reports.

Why does anyone care about turmoil in a nation with only 740,000 people? Simple: proximity.

As with much of the unrest sweeping the Arab world, events in Bahrain are providing yet another crash course for the rest of us in why these nations matter.

Yes, Bahrain is an oil producer. But it pumps only about 49,000 barrels a day, less than one-tenth of 1% of the world’s daily output. That’s not enough to earn an invitation to join the Organization of Petroleum Exporting Countries. But the island nation sits smack dab in the middle of the biggest oil-producing region in the world and has long played a key role in supporting the petroleum industry that pivots around it.

First a little history: Before Saudi Arabia burst into the oil world, there was Bahrain. Oil was discovered there in 1932 by Standard Oil of California, now Chevron
CVX, +0.64%
It was the first commercial well on the Arabian shores of the Persian Gulf.

Geologists had a strong hunch that Bahrain’s oil extended westward beneath the narrow waterway separating it from the Saudi mainland, where they were soon enough tapping into the biggest fields ever found.

Bahrain, its output quickly dwarfed by those of Saudi Arabia, Kuwait, Oman and the United Arab Emirates, turned itself into the gateway to its rich neighbors’ oil fields and began diversifying its economy. It’s now a regional hub whose activities include refining operations, fed mostly by Saudi crude arriving via pipeline, and a growing petrochemical industry.

Because of its ready access to cheap energy, Bahrain is also one of the world’s biggest aluminum producers. Alba, owned by the Bahrain government and the Saudi Public Investment Fund, runs an aluminum smelter capable of turning out 870,000 tons a year. Most of the alumina feedstock comes from Australia.

The tiny nation is also a key player in the shipping industry. At the heart of it is ASRY, the Arab Shipbuilding and Repair Yard Co. ASRY is a joint venture between Bahrain and six other members of the Organization of Arab Petroleum Exporting Countries (OAPEC). The yard and its giant dry docks tend to the needs of the bulk carriers and tankers that routinely call at this maritime crossroads

This is also one of the main reasons the U.S. Navy’s Fifth Fleet is headquartered in Bahrain, a pretty handy location for warships cruising the Gulf and one U.S. commanders would be loath to give up.

Overlying all this industrial activity is high finance, and Bahrain has worked hard to establish itself as a financial hub in a region awash in petrodollars. One thing financial centers don’t weather well, though, is revolution.

So as the wave of Arab protests that toppled Egypt’s Mubarak washes ashore in Bahrain, it’s not felt just in Manama but across the entire neighborhood.

For the oil market, this is all unfolding uncomfortably close to nations that are both the backbone of the industry and whose restive citizens still are ruled by absolute monarchies. And it’s unsettling for Bahrain’s other heavy industries since, unlike high-flying finance, they can’t pull up their stakes and move on a moment’s notice.

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